When Hurricane Waters Recede, Pollution Remains

Joseph L. Boren is Chairman of the Environmental product line at Ironshore Holdings (U.S.) Inc., Executive Vice President of Ironshore Insurance Services, LLC, President of U.S. Field Operations and Director of Strategic Relations. He has experience in every segment of the environmental market; a regulator, practitioner, and insurer. Joe can be reached at [email protected]

During a business trip to Houston last week, I read that Harris County, Texas, was going to file a lawsuit against Arkema Chemical. We should all remember Arkema Chemical as they seemed to be on the news just about every evening after Hurricane Harvey made landfall in Texas.

After losing power — and refrigeration — the chemicals in the Arkema plant started a fire. According to the Houston Chronicle, the subsequent explosion sickened first responders and exposed the surrounding area to untold amounts of contamination. I am not about to litigate the facts of this case, but it did get me thinking about the environmental consequences of storms like Harvey, Irma and Maria.

Let me make this point — the contamination issue pales in comparison to the loss of life, loss of your home and all of your possessions, living without power, being unable to feed your family and/or having no access to the simplest things like clean drinking water. Nevertheless, the issue of environmental contamination is incredibly serious.

It wasn’t just that tanks were crushed or that fuel oil and gasoline were everywhere; more dire was that sewage treatment plants were overrun and drums of chemicals were crushed open, leaking unknown chemicals in the flood waters.

To understand the gravity of our latest trifecta of superstorms, let me first return to an earlier time in my career, before I was in the insurance business.

Back then, I operated an environmental remediation company with a large customer base in the state of Florida. It was then and there where I met a Hurricane named Andrew. On August 24th, 1992, Andrew made landfall in Homestead, Fla. The damage was staggering – 25,000 homes destroyed, another 100,000 homes damaged and worst of all, lives were lost.

From Homestead to Kendall, Fla. — devastation was everywhere. As my company had remediation contracts with a number of major energy producers, we were asked to respond.

It wasn’t just that tanks were crushed or that fuel oil and gasoline were everywhere; more dire was that sewage treatment plants were overrun and drums of chemicals were crushed open, leaking unknown chemicals in the flood waters. It seemed that everything was contaminated — with what, we weren’t exactly sure. That story was repeated during Katrina as it now is with Harvey, Irma and Maria.

So what should we expect after the power returns, the waters recede, homes are repaired and a semblance of life is restored for our fellow citizens in Texas, Florida, Puerto Rico, the Virgin Islands and many places in between?

Serious pollution issues.

One government official said that “superfund sites” in and around Houston were intact. I have spent more than 40 years in the environmental industry, and I simply don’t understand how anyone could make such a statement. We have absolutely no idea of the reality and gravity of the situations just yet.

What we can be sure of is that America’s resiliency will win out, and the pollution will be eventually cleaned up.

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According to a survey conducted by The Hartford in Q2 2017, 80 percent of mid-to-large size companies in the U.S. are engaging in overseas business, ranging from executive travel all the way to manufacturing. Globalization and technology create opportunities to tap into new markets, and companies that don’t take advantage of those opportunities risk losing out to competitors that do.

“Eighty percent of mid-size companies have some type of international exposure, and we expect that these companies will only continue to increase their international activities going forward,” said Alfred Bergbauer, Vice President and Head of Multinational Underwriting, The Hartford.

Most mid-sized companies address their international exposure via a global master policy, which is issued in the U.S. and provides blanket terms and conditions to all of an insured’s operations, including those outside the U.S. Buyers may believe it fully covers any exposures faced abroad, but a U.S. global master policy may not operate as traditional local insurance would. For example, it may not be recognized by a local regulator and may be inconsistent with local law. Thus, the performance of the insurance may not be in line with the insured’s expectations of how the policy should perform in the event of a loss or where a certificate of insurance is required.

As a result, the U.S. issuing carrier may not be able to respond to a loss arising at an insured’s facility outside the U.S. as the insured might expect, and payments or reimbursements made to the insured resulting from that policy could carry significant tax penalties or fees.

“A U.S. contract cannot bend the rules and regulations of a sovereign nation,” Bergbauer said. “A U.S. master policy may be inconsistent with local insurance terms and conditions, norms and practice and thus cannot always address local country risk needs as a local policy issued in that country would. For risks located outside the U.S., such as risks arising from operations in other countries, master policies should be paired with coordinated, locally issued insurance policies.”

Brokers and buyers unaware of the specialized insurance structures required to legally transact business abroad could face the following three unintended consequences:

1. If the insured suffers a loss, they might not be indemnified.

Alfred Bergbauer, head of Multinational Insurance

Domestically, U.S. companies have very clear expectations for their insurers. If the insured suffers a compensable loss, they want their carrier to pay the claim ―whether it’s first- or third-party― and hire counsel to represent them if necessary. In other words, they expect full indemnity.

But this basic expectation for indemnification is not automatic in foreign countries. If an insured does not have a local policy and suffers a loss, an expedient claims payment may not always occur.

That is, “Without a local policy, the U.S. policy may not behave as the customer would expect it to,” Bergbauer said. “For example, in some countries, it may be more difficult to hire counsel, to utilize a claim adjuster to pay a local third party, and crucially, pay the insured’s local operation which suffered the loss.”

2. Claims payments could be subject to U.S. taxes.

If an insured has only a U.S. master policy, the insured’s foreign operation would be responsible for covering the loss in the foreign country and the U.S. insured would then seek reimbursement from its insurer in the U.S.

However, a claim payment made in the U.S. to cover a loss suffered by foreign entity is considered a taxable event in the eyes of the IRS.

“The IRS takes the view that the insured has no loss to offset against this payment, resulting in the payment being taxable at the U.S. corporate income tax rate —currently 21 percent,” Bergbauer said.

“It can be a very uncomfortable situation if the broker or insured were unaware of that dynamic.”

Getting hit with such a significant and unexpected tax leaves the insured short of the funds needed to recover from a loss, and threatens the trust placed in their broker to educate them about this exposure.

3. Failure to obtain insurance from a local carrier exposes the insured to many risks.

If an insured’s local operations are required to obtain property or liability cover from a local insurer either by local law or because the local operations need to provide certificates of coverage from local insurers, insurance provided by a U.S. insurer may not address these requirements.

“If the local regulator finds evidence that a local operation does not have insurance provided by a local carrier where it is required to do so, it can issue penalties against both the broker and the policyholder,” Bergbauer said. “China, for example, has issued penalties for unlicensed insurance equal to five times the amount of the illegal claim payment.”

Beyond a sizable bill, such companies also stand to take a hit to their reputations.

“You want to be viewed as an upstanding corporate citizen in the markets where you operate.” Bergbauer said.

“If a local newspaper calls you out for breaking the law, it can be tough to recover from.”

An Intensifying Exposure

All of the above risks stem from relying on a Global Master Insurance policy which does not leverage locally admitted policies. The risks associated with covering risks arising from foreign operations without local policies have always existed, but they have flown under brokers’ radar because enforcement of local insurance laws was relatively lax.

That is no longer the case.

Today, ministries of finance and regulatory authorities have started collaborating across borders to share information about foreign investment trends and audits conducted on foreign firms, even entering multilateral agreements to identify violators of insurance law.

“They look for the most egregious offenders and make examples of them,” Bergbauer said.

In light of the enforcement crackdown, multinational companies can ill afford to be uninformed of their international insurance risks or the solutions available to address them. Sophisticated brokers in the U.S. may be experts on domestic regulatory requirements, but too often they lack knowledge of varying rules and regulations outside our borders, and of the solutions available to fulfill them.

“Most companies with international exposures are never approached by their broker to discuss those risks and delve into the best way to insure them,” Bergbauer said.

“Brokers do not spend enough time discussing the extent of their customers’ international activities, or how their policies will respond to them. So we’re going out to our broker network and teaching them how to have this conversation.”

Keys to Compliance: Education and the Controlled Master Program

Through seminars, informational bulletins and one-on-one conversations, The Hartford is reaching out to agents and brokers to make education and awareness of regulatory risk a priority. And it offers a solution to fill in the gaps where a global master policy may fall short of local standards: a Controlled Master Program, or CMP.

The Controlled Master Program differs from a Global Master Policy in a few important ways. Primarily, it allows for the placement of locally-issued admitted policies along with a U.S. master policy, while keeping the administration, claims and risk control services consolidated with one single carrier.

This means clients have a single point of contact, no matter where they have insurable assets or where they incur a loss. A comprehensive global program administered by a single carrier presents the most streamlined and efficient way to address risk exposures arising out of international activity.

The Hartford leverages its global network infrastructure — spanning 150 countries around the globe — to identify where admitted insurance is required and then places good local standard policies in compliance with local regulations. By taking a holistic underwriting approach to the entirety of a company’s exposures, the negative consequences outline above can be avoided. The CMP offers the benefits of cost efficiency, claims consistency, an increased level of control for the buyer, and better regulatory compliance.

“The Hartford’s Controlled Master Program provides the coverage that you expect in the U.S., wherever you have exposure. Alignment among underwriting, risk control services and claims guarantee consistent loss response and level of service across the board,” Bergbauer said.

Perhaps most importantly, The Hartford’s proactive outreach ensures brokers are equipped to discuss and address their clients’ international exposures, helping ensure they don’t have to learn the consequences of providing coverage without local policies the hard way.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with The Hartford. The editorial staff of Risk & Insurance had no role in its preparation.

The Hartford is a leader in property and casualty insurance, group benefits and mutual funds. With more than 200 years of expertise, The Hartford is widely recognized for its service excellence, sustainability practices, trust and integrity.

I was trained as an accountant, worked in public accounting and became a CPA. Being comfortable with numbers is helpful in my current role, and obviously, the language of business is financial statements, so it helps.

R&I: How did you come to work in risk management?

Working in finance in the corporate environment included the review of budgets and the analysis of business expenses. I quickly found the area of benefits and insurance — and how “accepting risk” impacted those expenses — to be fascinating. I asked a lot of questions. Be careful what you ask for — I soon found myself responsible for those insurance areas and haven’t looked back!

R&I: What is the risk management community doing right?

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I have found the risk management community to be a close-knit group, whether that’s industry professionals, risk managers with other companies or support organizations like RIMS and other regional groups. The expertise of the carriers and specialty vendors to develop new products and programs, along with the appropriate education, will continue to be of key importance to companies going forward.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

As I’m sure many in the insurance field would agree, Hurricanes Katrina and Rita in 2005 changed our world and our industry. It was a particularly intense time and certainly a baptism by fire for people like me who were relatively new to the industry. This event clearly accelerated the switch to the acceptance of more risk, which impacted mitigation strategies and programs.

The fast-paced threat that cyber security represents today. Our company, like so many companies, is reliant upon computers, software and IT expertise in our everyday existence. This new risk has forged an even stronger relationship between risk management and our IT department as we work together to address this growing threat.

Additionally, the shooting event in Las Vegas in 2017 will have an enduring impact on firms that host large gatherings and arena-style events all over the world, and our company is no exception.

R&I: What insurance carrier do you have the highest opinion of?

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With the various types of insurance programs we employ, I have been fortunate to work with most of the large national and international carriers — all of whom employ talented people with a vast array of resources.

R&I: How much business do you do direct versus going through a broker?

We use brokers for many of our professional coverages, such as property, casualty, D&O and cyber. We are self-insured under our health plans, with close to 25,000 members. We tend to manage those programs internally and utilize direct relationships with carriers and specialty vendors to tailor a plan that works best for team members.

R&I: Who is your mentor and why?

I have been fortunate to have worked alongside some smart and insightful people during my career. A key piece of advice, said in many different ways, has served me well. Simply stated: “Seek to understand before being understood.”

What this has meant to me is try everything you can to learn about something, new or old. After you have gained this knowledge, you can begin to access and maybe suggest changes or adjustments. Being curious has always been a personal enjoyment for me in business, and I have found people are more than willing to lend a hand, offer information and advice — you just need to ask. Building those alliances and foundations of knowledge on a subject matter makes tackling the future more exciting and fruitful.

R&I: What have you accomplished that you are proudest of?

Our benefit health plan is much more than handing out an insurance card at the beginning of the year. We encourage our team members and their families to learn about their personal health, get engaged in a variety of health and wellness programs and try to live life in the healthiest possible way. The result of that is literally hundreds of testimonials from our members every year on how they have lost weight, changed their lifestyle and gotten off medications. It is extremely rewarding and is a testament to [our] close-knit corporate culture.

R&I: What’s the best restaurant you’ve ever eaten at?

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Some will remember the volcano eruption in Iceland in spring of 2010. I was just finishing a week of meetings in London with Lloyd’s syndicates related to our property insurance placement when the airspace in England and most of northern Europe was shut down — no airplanes in or out! Flights were ultimately canceled for the following five days. Therefore, with a few other stranded visitors like myself, we experimented and tried out new restaurants every day until we could leave. It was a very interesting time!

R&I: What is the riskiest activity you ever engaged in?

I am originally from Canada, and I played ice hockey from the time I was four years old up until quite recently. Too many surgeries sadly forced my recent retirement.

R&I: What do your friends and family think you do?

That’s a funny one … I am a CPA working in the casino industry, doing insurance and risk management, so neighbors and acquaintances think I either do tax returns or they think I’m a blackjack dealer at the casino!

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]